KEY POINTS:
Carpet maker Cavalier Corporation believes it will benefit from the purchase of Feltex by Australian firm Godfrey Hirst.
Feltex was put into receivership in September and is being bought at a price sufficient to repay the company's bank facilities of between $135 million and $140 million.
Speaking at Cavalier's annual meeting today, managing director Wayne Chung said that since April last year when Feltex advised the market of an earnings downgrade, there had been an inundation of negative press about Feltex.
None of that has been good for the industry, including Cavalier, he said.
During that time Cavalier had been invited, as it had been several times in the past, to look at becoming involved in Feltex.
"Ultimately, we chose not to because, in our assessment, it was not worth the risk.
"We felt it was a marginal call as to whether the business was worth the $140m that it owed the bank, and that without major synergistic gains it was not going to work for us," Mr Chung said.
"Feltex was no longer the New Zealand-based, wool carpet operation that we all remember. Following their highly leveraged purchase of Shaw Industries Australia in 2000 it was, like Godfrey Hirst, mainly an Australian-based, synthetic carpet producer.
"Because of the similarity of these two businesses, and the market sectors in which they operate, we would have expected Godfrey Hirst to see far greater synergies from the acquisition than we would."
The changes would be positive for Cavalier for two reasons.
Firstly, they would lessen competition to some degree.
Secondly, when two carpet businesses were put together some sales volume and market share normally dropped through the cracks, and Cavalier should be a beneficiary of that.
Carpets account for 78 per cent of Cavalier's group revenue and 94 per cent of earnings.
In the first four months of the new financial year, an improvement was starting to be seen in the Australian retail carpet market, at the higher end, where Cavalier mainly operated, Mr Chung said.
But there was still some softness in the New Zealand retail market, with consumers appearing a little cautious and holding back on refurbishment work in case of difficult times ahead.
The contract carpet market on both sides of the Tasman remained strong, particularly for carpet tiles in Australia.
The company classes as retail the sale of carpets mainly through the retail trade for home refurbishments and privately built new homes, while high-rise apartments and group home builders are classified as contract.
For the four months to October, the group's earnings before the costs of its Microbial project -- which aims to bring to market eco-friendly remedies against flystrikes and lice on sheep -- were up 5 per cent on last year.
That was about where Cavalier expected to finish for the first half of the 2006/07 financial year, Mr Chung said.
Cavalier was on track to achieving its budgeted 5 per cent increase in group earnings for the June 2007 financial year.
That would mean tax paid earnings , before Microbial costs, of $15.3m, up from $14.6m last year.
Cavalier shares were down 11c to $3.25 in early afternoon trade today.
- NZPA
